When it rains, it pours! Plummeting commodity prices drag down the Indonesian stock market, which tumbled 6%.

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Indonesia's stock market continued to plummet on Monday, with the benchmark Jakarta Composite Index falling as much as 6% intraday, making it the worst performing market in Asia. The drop was triggered by weakening commodity prices, with mining and energy stocks leading losses, putting the regulator’s newly launched market confidence restoration efforts to a tough test.

This new round of sell-off comes as Indonesian regulators intensively implement reform measures. After MSCI warned last week that it might downgrade Indonesia to frontier market status, Indonesian stocks experienced a “black week,” collapsing 16% in two days and losing over $80 billion in market value, leading to the resignation of exchange CEO Iman Rachman.

Regulators immediately announced a series of reforms, including instructing sovereign wealth fund Danantara to guide its asset management companies to buy shares, and planning to double the minimum free-float ratio to 15%.

Monday’s decline also followed risk-off sentiment in the Asian markets, as metal prices plunged and the US dollar strengthened after Trump nominated a new candidate for Fed Chair. Continued weakness in commodities could force regulators to adjust reform strategies to focus more on short-term stability.

Nomura Securities became the latest to downgrade Indonesian stocks due to extra risks, following Goldman Sachs’ downgrade last week. Although reforms sparked a market rebound last Friday, it remains uncertain whether the measures will meet MSCI’s requirements.

Commodity Price Crashes Intensify Market Pressure

Monday’s sell-off complicates rescue efforts by Indonesian regulators. The Jakarta Composite Index once plunged by 6%, with mining and energy stocks as the biggest drags. As an important commodity exporter, Indonesia’s stock market is highly sensitive to commodity prices.

Gary Tan, fund manager at Allspring Global Investments, stated that sustained selling in commodities could force regulators to “defensively redesign reform plans, with more emphasis on near-term stability and buffer measures.” He warned that this could slow the momentum of reforms and complicate changes aimed at improving Indonesia's long-term investability.

Regulatory Reforms Win Institutional Support, but Outlook Remains Uncertain

Despite new selling pressure, some institutions are positive about Indonesia’s recent reforms. Citi Group strategist Ferry Wong wrote in a February 2 report that the newly appointed regulator “has practical experience in trading, clearing, settlement, and custody—key areas emphasized by MSCI, and should be able to execute quickly.” Citi believes the coordinated policy response is “reliable and timely, reducing the risk of MSCI taking more severe follow-up actions.”

Oki Ramadhana, CEO of PT Mandiri Sekuritas, stated: “I am one hundred percent certain our market will be better in the future with transparency measures. This will take time, but we have seen the commitment from the government and Danantara to encourage a better price discovery mechanism based on supply and demand.”

David Sutyanto, president of the Indonesian Association of Equity Analysts, believes that the "bold move" in Sunday’s announcement is having Danantara serve as a market buffer, which could boost market sentiment.

Valuation Discounts Cannot Hide Structural Concerns

Morgan Stanley analysts, including Derrick Y Kam, noted in a January 30 report that the MSCI Indonesia Index is currently cheap compared to historical levels, with a 12-month forward P/E of 11.3x—about 20% below emerging market averages. However, they warn, “given the trend of slowing USD-denominated earnings growth and ROE erosion, we expect valuations may remain subdued for a while.”

Nomura strategist Chetan Seth downgraded Indonesian equities from overweight to neutral, citing investability risks and passive fund outflows. He said: “MSCI’s warning of a downgrade to frontier market status surprised both us and the market.” Nomura’s prior positive stance was based on attractive relative valuations, stabilizing economic and corporate profit expectations, and low market expectations after long-term underperformance.

Downgrades by Goldman Sachs and other firms, combined with macro policy uncertainty, have caused foreign investors to take a cautious wait-and-see attitude toward Indonesia’s market. While regulators have introduced reforms addressing MSCI’s key concerns, whether these can quickly restore market confidence remains to be seen.

Risk Warning and DisclaimerThe market has risks, investments must be made with caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their particular situation. Investments made based on this article are at users’ own risk.

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